Let's say that you or your client is sued for breach of contract and negligence. You send the suit papers to the general liability insurer and it agrees to defend the claim, but under a "reservation of rights." The basis of the reservation is that while the negligence claim is covered, the breach of contract claim is not a covered loss. Therefore, if the negligence claim is eventually dismissed, the insurer reserves its right to withdraw coverage for the remaining contract claim.

Let's assume further that the lawyer assigned by the insurance company decides that the negligence claim is weak and moves to dismiss only that part of the lawsuit. If insurance defense counsel is successful, your client may lose her insurance coverage, have to pay thousands of dollars in defense costs and pay any judgment or settlement on her own.

Under this circumstance, is the insured entitled to a lawyer to protect her interest in insurance coverage? Does the insurance company have any potential obligation to pay for this independent lawyer? The answer to both questions is YES!

In Navy Federal Credit Union v. Cumis Ins. Co., the California Court of Appeals held that an insurer must pay for independent counsel for an insured when an actual conflict has arisen in the underlying case which could result in the withdrawal of coverage. Such an independent lawyer has become known in the insurance industry as "Cumis Counsel." This is still an open issue in Pennsylvania. But, one commentator notes that the trend is to require the insurance company to pay for independent coverage counsel if a conflict of interest actually arises.

The practical advice is that if you or your client receives a Reservation of Rights letter, it is not time to file that letter away and forget about it. Independent or "Cumis" counsel may be needed to monitor the lawsuit and, in the right circumstance, the insurance company may have to pay those fees as well as those of insurance defense counsel.